About 1.2 million British households could suffer outstanding mortgage debt higher than the value of their home, it said in twice-yearly Financial Stability Report.
A 15% drop in prices from their October 2007 peak would leave one in 10 homeowners in negative equity, the bank confirmed.
'House price forecasts suggest further falls, although the size of these falls is highly uncertain,' the report said.
A global shortage of capital has forced many banks to restrict lending, choking the UK housing market. Prime Minister Gordon Brown warned last week that Britain is likely to suffer a recession.
The bank's report said house prices have dropped faster in Britain than in the United States. They are already down 13% from their peak and are close to the total nominal fall seen during the last recession in the early 1990s.
First time buyers would be among those hardest hit by falling house prices, the bank added. They are more likely to have had a smaller deposit and would have borrowed more to get a foot on the housing ladder, making them more vulnerable.
Buy-to-let landlords may fall behind on mortgage payments or be forced to sell at a loss as lending dries up and their investments lose value, the report added.
The report was published at the same time as two further sets of figures provided more bleak news for the housing market.
The Financial Services Authority said the number of home repossessions in the second quarter rose to 11,054 from 9,172 in the previous three months.
The Land Registry said house prices in England and Wales fell by 8% on the year in September to their lowest level in two years. The average price in September was £168,814 pounds, a fall of 2.2% on the month.